U.S. plants used an estimated 69% of their full production capacity for the second quarter of 2010. That's up from nearly 60% in the same period last year but still down from second-quarter 2008 when plants used 73% of their production capacity during the pre-recession period, the U.S. Census Bureau reported on Sept. 30.
The economic downturn caught many manufacturers off-guard, forcing them to make some difficult decisions about how to handle excess plant capacity. Nearly everyone undertook basic belt-tightening initiatives, including layoffs, overtime reductions and cutting non labor expenses, says Stephen Maurer, managing director of the manufacturing practice at advisory firm AlixPartners.
Manufacturers should diversify their customer base to prevent future capacity utilization issues.
But Maurer cautions that insourcing driven by a desire to absorb fixed costs rather than part of a larger strategy could backfire. "If a part or process was noncore before, it is still noncore," he says. "Filling up your plant with low-margin, noncore work -- sometimes at an increase in variable cost -- to absorb overhead is almost always a bad idea in the long run," he says. "Companies should be taking the longer view, operating to a consistent manufacturing and supply chain strategy and taking the hard steps to get their cost structure in line to support that strategy at the current volumes."
Office furniture manufacturer Steelcase Inc. didn't resort to insourcing for the same reasons cited by Maurer. "We stuck to our strategy of only doing things that are a core competency and didn't want to pull things in and then move them back out again later," says Mark Baker, the company's senior vice president of global operations.
Steelcase consolidated some operations, but Baker says that would have happened regardless of the economic climate. "Frankly, we would have done that whether the recession had occurred or not, as these were part of our long-term strategy for reinventing our industrial model," he says.
Updike recommends that manufacturers diversify their customer base to prevent future capacity issues. In the past, one customer may have dominated 60% to 70% of a manufacturer's business, but nowadays companies need to be more aggressive in their efforts to establish new customers so they don't have their eggs all in one basket, Updike says.